2011 Ontario Economic Outlook and Fiscal Review

Chapter IV: Borrowing and Debt Management

HIGHLIGHTS

  • The total long-term public borrowing requirement over the forecast period has been reduced by $3.6 billion compared to the 2011 Budget, primarily because of the lower deficit recorded in the 2010–11 Public Accounts and the lower projected deficit in 2011–12.
  • Long-term public borrowing for 2011–12 will remain at the Budget forecast of $35 billion to smooth the borrowing program over the next three years while taking advantage of historically low interest rates and robust demand for Ontario long-term debt.
  • Interest on debt (IOD) expense in 2011–12, at $10,097 million, is $193 million less than forecast in the 2011 Budget. This reduction in IOD primarily reflects the impact of lower interest rates and the lower deficit in 2010–11.
  • Total debt is projected to be $257.3 billion as at March 31, 2012.
  • Net debt is projected to be $238.4 billion as at March 31, 2012.

Long-Term Public Borrowing

The forecast long-term public borrowing requirement for 2011–12 is $35.0 billion. As at November 15, 2011, $24.3 billion, or 70 per cent, of the long-term borrowing requirement was completed. This figure includes Ontario Savings Bond sales of $0.6 billion.

The Province has been able to continue to extend the term to maturity of its debt while locking in interest rates below the forecast used in the 2011 Budget. The weighted-average term to maturity of long-term provincial debt issued so far in 2011–12 is 11.6 years, compared to 12.8 years for 2010–11 and 8.1 years for 2009–10. This term to maturity extension reduces refinancing risks and helps offset the impact of expected higher interest rates in future years on the Province’s interest on debt (IOD) costs.

The IOD expense in 2011–12, at $10,097 million, is $193 million less than forecast in the 2011 Budget. This reduction in IOD primarily reflects the impact of lower interest rates and the lower deficit in 2010–11.

So far this year, Ontario has issued $18.2 billion (almost 75 per cent) in the Canadian dollar market, well above the 60 per cent target set out in the 2011 Budget. The Province now expects to end the year with more than 70 per cent of its borrowing in this market.

Chart 1: 2011-12 Borrowing-Canadian Dollar Market

Canadian dollar borrowing has been completed through a number of instruments:

  • syndicated issues
  • floating rate notes
  • Ontario Savings Bonds.
Chart 2: 2011-12 Borrowing-International Markets

International markets have remained an important source of funding for Ontario this year. About $6.2 billion, or over 25 per cent, of borrowing has been completed in foreign currencies:

  • three Global bonds in U.S. dollars
  • two Euro Medium-Term Notes (EMTNs) in Norwegian kroner
  • a Kangaroo bond in Australian dollars.
Table 1
2011–12 Borrowing Program:
Province and Ontario Electricity Financial
Corporation
($ Billions)
  Budget
Plan
Current Outlook In-Year Change
Deficit 16.3 16.0 (0.3)
Investment in Capital Assets 10.9 10.9
Non-Cash Adjustments (3.6) (3.6)
Net Loans/Investments 2.7 2.4 (0.3)
Debt Maturities 13.9 13.9
Debt Redemptions 0.5 0.3 (0.2)
Total Funding Requirement 40.7 40.0 (0.7)
Canada Pension Plan Borrowing (1.1) (1.1)
Decrease/(Increase) in Short-Term Borrowing 0.7 0.7
Increase/(Decrease) in Cash and Cash Equivalents (4.6) (7.8)  
(3.2)
Provision for Debt Buy-Backs 3.2 3.2
Total Long-Term Public Borrowing 35.0 35.0
Note: Numbers may not add due to rounding.

The lower deficit in 2010–11 resulted in the Province beginning 2011–12 with higher cash reserves than forecast at the time of the 2011 Budget. Still, long-term public borrowing will remain at the Budget forecast of $35 billion this fiscal year. This will allow the Province to smooth the borrowing program over the next three years, while taking advantage of historically low interest rates and robust demand for Ontario long-term debt.

The Province plans to buy back debt maturing over the next two fiscal years, as reflected in a new line in Tables 1 and 2, “Provision for Debt Buy-Backs,” if the opportunity arises. These debt buy-backs would result in the Province reducing Cash and Cash Equivalents by $3.2 billion more than forecast at the time of the Budget, while still ending fiscal 2011–12 with the same level of cash reserves as was targeted in the Budget.

Table 2
Medium-Term Borrowing Outlook:
Province and Ontario Electricity Financial
Corporation (OEFC)
($ Billions)
  2011–12 2012–13 2013–14
Deficit 16.0 15.2 13.3
Investment in Capital Assets 10.9 11.5 10.5
Non-Cash Adjustments (3.6) (3.4) (3.9)
Net Loans/Investments 2.4 1.2 1.0
Debt Maturities 13.9 17.3 23.8
Debt Redemptions 0.3 0.3 0.3
Total Funding Requirement 40.0 42.1 45.1
Canada Pension Plan Borrowing (1.1) (0.8)
Decrease/(Increase) in Short-Term Borrowing 0.7 (3.0) (3.0)
Increase/(Decrease) in Cash and Cash Equivalents (7.8)
Provision for Debt Buy-Backs 3.2 (1.2) (2.0)
Total Long-Term Public Borrowing 35.0 37.2 40.0
Note: Numbers may not add due to rounding.

The total long-term public borrowing requirement over the forecast period has been reduced by $3.6 billion compared to the 2011 Budget, primarily because of the lower deficit recorded in the 2010–11 Public Accounts and the lower projected deficit in 2011–12.

The availability of debt to buy back at fair prices with the appropriate accounting treatment will determine whether the Province proceeds with the planned debt buy-backs. If it is not cost effective to buy back debt, the Province will finish the year with higher cash reserves than targeted in the Budget. Either buying back debt, or retaining higher cash reserves, will have the same impact of decreasing the Province’s net debt from the Budget forecast.

Debt

Total debt, which represents all borrowing without offsetting financial assets, is projected to be $257.3 billion as at March 31, 2012, compared to $236.6 billion as at March 31, 2011.

Ontario’s net debt is the difference between total liabilities and total financial assets. It is projected to be $238.4 billion as at March 31, 2012, compared to $241.5 billion forecast in the 2011 Budget. Net debt was $214.5 billion as at March 31, 2011.

Total Debt Composition

Total debt is composed of bonds issued in both the short-and long-term public capital markets and non-public debt.

Ontario had total debt of $251.9 billion as at September 30, 2011. Public debt totalled $236.8 billion, primarily consisting of bonds issued in the long-term markets in Canadian dollars, and internationally in U.S. dollars and nine other currencies. The Province also had $15.1 billion outstanding in non-public debt issued in Canadian dollars. Non-public debt mainly consists of debt instruments issued to public-sector pension funds in Ontario and the Canada Pension Plan Investment Board. This debt is not marketable and cannot be traded.

Chart 3: Total Debt Composition as at September 30, 2011

Debt-to-GDP Ratios

The Province’s debt-to-GDP ratios are expected to increase due to the projected deficits. The ratios will stabilize and begin to decline as the deficit is eliminated.

Chart 4: Net Debt-to-GDP
Chart 5: Accumulated Deficit-to-GDP

Cost of Debt

The effective interest rate (on a weighted-average basis) on total debt was 4.43 per cent as at September 30, 2011 (March 31, 2011, 4.54 per cent).

Chart 6: Effective Interest Rate (Weighted Average)

Risk Exposure

The Province limits itself to a maximum net interest rate resetting exposure of 35 per cent of debt issued for Provincial purposes and a maximum foreign exchange exposure of five per cent of debt issued for Provincial purposes. As at September 30, 2011, the net interest rate resetting exposure was 5.8 per cent and foreign exchange exposure was 1.1 per cent.

All exposures have remained well below policy limits in 2011–12.

Chart 7: Net Interest Rate Resetting Exposure

Chart 8: Foreign Exchange Exposure